Despite critics, US tax-reform plan draws widespread favor
As former Internal Revenue Service Commissioner Sheldon S. Cohen says of Washington lawyers: ``There are guys around town who will sell any kind of fish -- good fish, bad fish, smelly fish.'' Many of these ``guys,'' on behalf of their clients, are now attacking various aspects of the Treasury's comprehensive tax reform study. ``It is being attacked from 18 sides,'' said Thomas Fields, tax reform advocate and publisher of Tax Notes.
Tax reform, however, did get support Wednesday from someone who counts especially -- President Reagan, in his State of the Union message.
The three-volume Treasury study proposes elimination of an enormous number of tax loopholes, benefits, incentives -- choose your nomenclature -- to simplify the nation's extraordinarily complex income tax system. This broadens the ``tax base'' and permits much lower income tax rates to bring in the same amount of revenue. The Treasury proposal would set up a three-tiered personal income tax system, with marginal tax rates of 15, 25, or 35 percent. The present system has a gradual, progressive tax, going up to 50 percent for high-income individuals or couples.
The study is now undergoing a reworking by Treasury officials, taking some account of thousands of letters and more than 100 meetings with those who have complaints. The goal is to present a revised plan to Congress by the end of next month.
But the basic simplification idea will survive the review -- and it appears to have the backing of the public. A Washington Post/ABC News poll found 2-to-1 support of the Treasury's tax plan. The poll also suggests that many of the supporters have little or no understanding of the modified flat-tax proposal, but because they regard the present system as so unjust, they are all for any changes aimed at making the tax system fairer.
To tax reformers, the Treasury package has several advantages:
1. Equity: A fair tax system should tax people with the same gross income at the same rate, barring special circumstances. Many see the present system as so full of exceptions, some justified, some not, that they believe it is no longer fair. In part this has led to a growing ``compliance problem.'' More people, the experts say, are cheating on their taxes by not reporting income, creating fictional deductions, and so on.
2. Simplification: With the tax code now running some 40,000 pages, the system has become nearly impossible for the layman to understand -- or, for that matter, the experts.
Not everyone has a problem, of course. Last year taxpayers returned some 19.9 million of the short 1040A forms and 16 million of the even easier 1040EZ forms, compared with 62 million of the longer 1040 form. Overall, however, the actual preparation of tax forms and hiring of tax help is costly.
Joel Slemrod, a University of Minnesota economist now on the staff of the Council of Economic Advisers, says a conservative estimate of total tax collection costs for the individual income tax system (including the cost of filing borne directly by taxpayers, the resources used by the collection agencies, and such third parties as the employers who withhold taxes) comes to 7 or 8 percent of total revenue, or about $30 billion annually.
Each of the nation's 98 million taxpaying households spends about $254 in time (valued at after-tax wage rates) and money on tax compliance. Average tax preparation time is 22.3 hours. Simplification, however, won't save as much time and money as many might expect, according to Mr. Slemrod. Eliminating itemized deductions would save $47 or $42, according to one estimate, but only $2.80 according to another. The latter assumes that because the system is simpler, some taxpayers would not employ professional help but spend a little more of their own time on tax preparation.
Slemrod's simplification is not the same as the Treasury's. Nonetheless, he figures his calculations are ``suggestive'' of those the Treasury might offer.
Simplification, although it wipes out many inequities, can also create some. Says former IRS Commissioner Cohen: ``A simple tax system is very arbitrary. It never makes any ifs, ands, and buts. Once you make an exception, you are lost. But simplicity, understanding, and confidence of the public are so important that a certain amount of equity has to give way.''
3. Economic efficiency: Nearly all those interviewed spoke of the gains an economy should make -- after an initial period of some disruption and adjustment -- when decisions are made on the basis of economic realities rather than tax considerations.
``It would improve the allocation of resources in the economy,'' said Joseph A. Pechman, a Brookings Institution economist. ``But tax reform isn't the end-all and be-all of economic growth.''
Some supply-siders have attacked the Treasury proposals because it would eliminate various provisions favoring capital investment and venture capital. But Mr. Pechman says allegations that the plan would reduce economic growth are ``just preposterous.''
Walter W. Heller, who was chairman of the Council of Economic Advisers under President Kennedy, comments: ``It is ironic that those who are presumably wedded to the free market and supply-side economics are the most critical and derisive of a plan that would adhere to the principles they approve.'' Dr. Heller, however, concedes that the economic effect on investment of the Treasury plan is extremely difficult to predict or calculate.
All tax experts interviewed for this column have objections to some details of the plan, especially on the corporate income tax side. For instance, former IRS Commissioner Donald C. Alexander did not like limitations on charity contributions, abolition of the deduction for state and local taxes, or the interest indexing system. Mr. Alexander also would prefer the nation cure inflation itself rather than, as the Treasury plan suggests, index aspects of the corporate tax system to deal with the impact of inflation on tax burdens.
None of these tax experts believes the tax package will win easy approval. They figure ``special interests'' will kill most of the proposal, just as they have several similar plans in the postwar years. Mr. Cohen says the newly confirmed Treasury secretary, James A. Baker III, could be ``eaten alive'' by interests objecting to one facet or another of the proposal. ``The first time he makes a concession, a line will form a block long.''
Dr. Heller notes that this reform effort is different in that two major tax simplification efforts are being pushed on Capitol Hill -- the Bradley-Gephardt and Kemp-Kasten bills. But tax reform will also be competing for congressional time and priority with the deficit reduction proposals. ``It will end up being a kind of pick-and-choose reform,'' he says. ``I don't see the thing going through as a beautiful whole.''